I hate doing taxes.
Before I developed my tax prep system, doing my taxes was painful and no fun. Seriously, tax prep is never as fun as the business trip I just took and can legally write off.
But everyone knows that paying your taxes is essential. You have to invest time into doing your taxes if you want to take advantage of every deduction and credit available to you. Spending a little bit of time now can save you a lot of money later.
Follow these four simple tax saving tips to maximize your returns and reduce how much you pay in taxes. If you end up with a tax refund, consider these six ways to build wealth with your tax refund.
1) Reflect on the Last Year
Sometimes my year goes by so quickly I forget how much I accomplished. Therefore, I keep a journal of personal and professional milestones to help me remember.
Before you get started with crunching the numbers and filling out tax forms, reflect on your previous year. Take time to remember all of your successful moments, financial hiccups and anything in between.
For example, did you buy a house, have a baby, or come into a lot of cash and give a bucket of money to charity? All of these things matter, and here’s why.
If you bought a house, first let me say congrats! As a new homeowner, you’re now able to deduct mortgage interest on loans up to $750,000 and write off property taxes up to $10,000 per year. You can thank the 2018 Tax Cuts and Job Act for these new lower tax deduction limits (down from $1,000,000).
Child Tax Credits
Having a baby is a huge life-changing event that comes with some tax perks, too. Following a new addition to your family, you can get a $2,000 refundable child tax credit plus tax credits for child care expenses. Hopefully, after your baby arrived, you also updated your W-4 with your employer and reduced your withholdings.
You may be able to deduct charitable donations you made to your church, favorite nonprofit organization or charity. It’s essential to keep your donation receipts and to confirm the organization you gave to qualifies for the deduction according to the IRS. You can look up any organization using this IRS database.
What you can consider a charitable donation depends on how much you give or the value of the item you donated. It also matters who you donated to and whether or not you donated as an individual or a business. More importantly, you have to itemize your deductions to take advantage of writing off your charitable donations. Here is a guide that can help you figure out what’s best for you when it comes to what you gave to charity last year.
2) Decide to Itemize or Take The Standard Deduction
Before you file your taxes, you must decide if you want to claim the standard deduction ($12,200 in 2019 for singles) or itemize your tax deductions. To help you decide, let me first explain the difference between itemizing and taking the standard deduction.
A standard deduction is a set amount you can reduce your adjusted gross income by without telling the IRS all the gory details about your previous year’s expenses. The standard deduction for 2019 is $12,200 for singles and $24,400 for married joint filers. For most people, claiming the standard deduction is simple, easy and saves you time on your taxes.
An itemized deduction is an expense authorized by the IRS that can decrease your taxable income and the amount you pay in taxes for the year. However, if you want to claim all the tax deductions you qualify for you must list all of your deductions and complete a longer form to file your taxes. You should itemize your tax deductions if the total you can deduct exceeds the standard deduction amount. This means you will have a bigger deduction than the standard amount and will pay less in taxes or receive a bigger refund.
Mortgage interest, medical costs, real estate taxes, and casualty from theft or loss are just a few examples of expenses you can itemize. Just remember that for some itemized deductions, you will need to have proof of the expense or loss to claim it. Also, thanks to the new tax bill in 2018, the standard deduction amount was raised significantly, meaning it takes a lot more itemized deductions to beat the standard deduction amount.
3) Max out Your Traditional IRA Contributions NOW!
You have until April 15th to make contributions to your Individual Retirement Account (IRA) for the previous tax year. An IRA is a retirement account that comes with tax benefits too. If you qualify to contribute to a Traditional IRA, maxing out before the deadline could be great for you. You can get a tax break now, and have more money saved for retirement later. That’s a win-win.
Knowing if you qualify to contribute depends on if you have a retirement plan at work and your modified adjusted gross income (MAGI). Use this calculator to help you determine which IRA might be right for you and how much you can contribute. In most cases, if you don’t have a retirement plan at work, you can deduct all of your IRA contributions, regardless of your income.
4) Gather All Your Statements, Receipts and Expenses
Set aside a specific date and time to do your paperwork. If taxes frighten you or if your situation is very complicated, consider hiring a professional to do your taxes for you.
When I decided to invest in real estate and start a few side hustle businesses, my husband and I decided we needed a Certified Public Account (CPA). Sometimes the expertise of a professional will make filing your taxes faster and less stressful. Plus, the CPA should be able to maximize all the deductions and write-offs you qualify for, which means paying less in taxes.
Whether you hire a pro or do your taxes yourself, you are going to have to gather all your documents before you can start the filing process. Start looking for tax forms, like your W-2, 1099s from your brokerages, and tax forms from your property managers, to come via email or in the mail after January 1st. Most investment companies send out account statements no later than mid-February.
Some items you should remember to include are mortgage statements, 529 statements for college savings plans, bank statements with interest earned on investments and savings, and proof of your retirement contributions.
All year round, you should be keeping track of any business, medical or other expenses you plan to itemize or deduct from your income. Keep receipts for paid expenses, mileage and revenue earned through a business.
If you discover that you owe Uncle Sam, don’t skip filing to avoid the payment. It is always better to file your taxes on time than to file late. If you cannot afford to pay your tax bill before April 15th, ask for a payment plan.
Just Do It!
Follow these tax saving tips and you will be on your way to being done with your taxes in no time.
And remember, taxes are something you should think about year round. If you owe money to the IRS this year, find out why and consider increasing your withholdings so you won’t owe anything next year. Figure out what tax deductions you can work on this year to lower your taxable income for next year. Investing more in your retirement account or selling stocks that have lost value are two options you may be able to take.
Also, consider working with a pro to help with end-of-year or quarterly tax planning. Tax planning allows you to pay taxes at the end of each quarter based on estimates, so you have less work to do during tax season and a smaller tax bill from the IRS. We all have to pay taxes, but mastering the process means you’ll pay less to the IRS and keep more of your hard earned money.
Acquania Escarne is the creator of The Purpose of Money, a community of women building generational wealth for their families one dollar at a time. As an entrepreneur, real estate investor, and licensed insurance agent, Acquania has always been passionate about financial literacy. On her website, Acquania blogs about ways to help you improve your money habits, create wealth, and invest in real estate. Follow Acquania on social media for daily tips.